Walter Industries, Inc.
Walter Industries, Inc., is a holding company that owns home building, natural resources development, and industrial manufacturing companies. Subsidiary Jim Walter Homes, Inc., builds and sells detached, single-family residential homes, mainly in the southern United States; other company subsidiaries offer home mortgages and homeowner's insurance. Jim Walter Resources, Inc. mines coal and extracts methane gas from coal seams in Alabama. The company's primary industrial operations include Sloss Industries Corporation, which manufactures coke, slag wool, and specialty chemicals, and United States Pipe and Foundry Company Inc., the leading maker of ductile iron pressure pipe in the nation.
Origins as Marketer of Shell Homes in 1940s
In 1946 James W. Walter borrowed $400 from his father, a citrus grower, and purchased a "shell," or unfinished home, for $895 from Tampa, Florida, builder, O.L. Davenport. When just three days later, the 23-year-old, newly married Walter sold the home to a passerby for a profit, he saw a way out of his $50-a-week truck-driving job and $50-a-month apartment. Walter convinced Davenport, also in his 20s, to take him on as a partner. As Walter remembered in Nation's Business in 1970, "we made out all right, but I thought we could move faster." Walter encouraged Davenport to run bigger advertisements featuring photographs of the homes; they sold more houses. Walter was enthusiastic about building the business even faster. Davenport was reluctant, and after two years, they dissolved the partnership of Davenport & Walter. The men decided to divide the business: one of them would take the assets of about $50,000, the other the business. Since Davenport was the founder, he first opted to take the business. A day after he made his decision, he told his partner he had changed his mind and chose the assets instead. Davenport took his share and bought a motel and small construction firm in Troy, Alabama. Jim Walter continued the business, now called the Walter Construction Company.
In the post-World War II era, housing was scarce. Jim Walter sold unfinished, traditionally constructed homes as affordable, alternative housing. The wood homes were built on concrete foundations or wood pilings. Each home was completely finished on the outside with an unfinished interior. Buyers installed plumbing, electrical systems, insulation, walls, and doors themselves. Homes were sold directly to owners prior to construction, through one of Jim Walter Homes Division sales offices.
In 1955 Jim Walter incorporated the Walter Construction Company as the Jim Walter Corporation. Three men who would be pivotal to the company's success through the coming decades had already joined the firm. James O. Alston came to the company in 1947 and was instrumental in its early growth. Alston was president of the corporation from 1963 to 1970, chairman of the homebuilding operation, and vice-chairman of the corporation by 1970. Arnold F. Saraw, a partner in Walter Construction, was secretary-treasurer of the corporation from 1955 to 1970. In 1970 he was promoted to senior vice-president, heading the corporate mortgage division. The third man, Joe B. Cordell, an accountant who joined the company in 1958 was vice-president and chief financial officer, becoming president in 1974 and chief executive officer in 1983.
Expansion into Mortgages in the 1950s
During the 1950s the company expanded and entered the mortgage business. Initially, financing was difficult. The turning point for the fledgling company came in 1956 when Chicago creditors Walter E. Heller & Company approved a $1 million line of credit. Jim Walter's mortgages, like his homes, were attractive to buyers who found more conventional sources too costly. Jim Walter Corporation's innovative financing plan was outlined in the May 19, 1987, edition of Financial World: "most of the houses … are financed on the basis of ten percent fixed mortgages or installment notes maturing in up to 20 years. Unlike a conventional mortgage, … Jim Walter's buyers spread the interest and principal payments evenly across the term to lessen its risk of defaults." Such mortgages were possible because the company required the purchaser to own the land on which the house was to be built. The equity in the land substituted for the traditional cash down payment. The company's mortgage portfolio was traditionally one of its strongest assets. The mortgage finance division maintained more than $1 billion in installment notes in the 1970s. By 1987 Jim Walter's $1.6 billion mortgage portfolio was larger than those of most Florida savings and loans. An evaluation performed in 1988 by Financial Security Assurance, in a maneuver designed to help Kohlberg Kravis Roberts (KKR) and Walter Industries refinance $1.2 billion in bank debt, put the value of Walter's mortgage portfolio at $1.75 billion.
Sales of Walter homes historically ran counter to other builders' sales due to the availability of low-cost financing. Low, fixed interest rates, combined with an affordable product, ensured that when housing starts were generally down and money was tight, buyers looked for alternatives such as those offered by Jim Walter. During 1982 Jim Walter built 10,000 of the 300,000 homes constructed that year. In 1986 Walter homes accounted for just 6,500 of the 500,000 homes built. The company tallied some of its best years during recessions in the housing industry.
From 1955 to 1962, Jim Walter Corporation was primarily involved in the building industry. Walter's only notable acquisition during the 1950s was the First National Bank in St. Petersburg, Florida, later sold. This foray was the start of a policy of diversification.
Diversification in the 1960s and 1970s
During the 1960s and 1970s, the company made a large number of acquisitions and mergers. Walter acquired no less than 15 different subsidiaries in the 1960s, ranging from building-materials and industrial-products manufacturers to a California savings and loan. The Celotex Corporation merger was initiated in 1962 and completed in 1964. A pioneer in sound insulation and a leading manufacturer of building products, Celotex also made a spray-on asbestos insulation. The company also acquired a sugar firm and an oil exploration company. Two paper companies acquired in 1968, Marquette Paper Corporation and Knight Paper Company, rounded out Jim Walter's early acquisitions.
On March 9, 1964, Jim Walter Corporation was first listed on the New York Stock Exchange. Shares initially sold for $.50. From 1969 until 1979, stockholders enjoyed positive results: dividends increased from $.40 to $1.80 per share; book value increased from $6.46 to $34 per share. By 1970, the shares had twice split three ways.
Over the course of the 1960s, over 200 competitors tried to emulate the company's success in the production of shell homes. By the end of the 1970s, Jim Walter, the originator of the concept, was the only one left and his "rags-to-riches" saga had become a part of Florida folklore. A Tampa cab driver, who did not recognize his passenger, regaled Jim Walter with the story of Jim's life. In 1968, on the 20th anniversary of the founding of the company, Jim Walter commemorated his beginnings by buying back the original shell house he had first owned for just three days in 1946.
In 1969 the company bought United States Pipe and Foundry Company of Birmingham, Alabama, for $135 million in stock and cash. By 1979, U.S. Pipe had increased profits five times over. In the July 13, 1979, issue of Forbes, Walter called the purchase "the quickest deal I ever made."
At the time of the acquisition, U.S. Pipe's modest coke operation and unmined coal reserves attracted little attention. By 1973, however, the Arab oil embargo made coal mining a potential bonanza. In 1976 the company created a subsidiary, Jim Walter Resources, Inc., to direct the company's mine-development program. Since Jim Walter knew home building but not mining, he hired experienced people to guide the mining division. The magnitude of the task, faced by a company with no experience in the difficult longwall mining that was required due to the depth of the coal, was daunting. The company's robust cash flow was able to absorb the crush of capital expenditures during the nearly ten years it took to make the mines operational.
During the 1970s Jim Walter continued to diversify the company, adding another dozen subsidiaries. By the end of the decade Jim Walter was involved in coal mining; marble, limestone, and granite quarrying; oil and gas production; gypsum and asbestos mining; a savings and loan association; an insurance company; a paper-marketing firm; water and waste-water pipe manufacturing; and retail jewelry. While the various mergers and acquisitions broadened Jim Walter's base of operations, the bulk of its revenues remained in the building industry, with more than 200,000 shell homes completed by 1979. Sales in 1979 exceeded $2 billion a year.
Company Perspectives:
Walter Industries, Inc.'s businesses are diversified, yet unified in their goals of providing quality products and services that exceed their customers' expectations, increasing shareholder value and creating an environment where employees thrive and grow.
Asbestos Litigation and KKR Takeover in the 1980s
In 1972 Panacon Corporation, the third-largest Canadian producer of asbestos, was merged into Celotex Corporation. As the link between asbestos and cancer became clear, lawsuits from workers began to accumulate. Jim Walter's 1986 10-K form reported that two subsidiaries, Celotex and Carey Canada Inc., were co-defendants with a number of other miners, manufacturers, and distributors of asbestos products in a "substantial number" of lawsuits alleging work-related injuries. Many of the suits requested punitive as well as compensatory damages. According to the company, "the aggregate damages sought in these cases is substantial." What followed was a series of convoluted suits, and counter suits, on behalf of both defendants and plaintiffs, with mixed results. The company thought its insurance carriers would handle the claims, but coverage after 1977 disallowed asbestos-related claims. In 1985 the subsidiaries and codefendants entered into an agreement to resolve the claims. All claims filed after June 19, 1985, were to be referred to the Asbestos Claim Facility, set up by the agreement, with the cost of litigation or mediation to be shared by all the defendants according to a formula based on their asbestos litigation experiences.
Jim Walter's home-building division continued to produce strong results through the 1980s. In 1986 the company maintained 103 sales offices scattered through 29 states, most of them in the South. The homes were constructed by local construction firms who were subcontracted to do the work. Shell homes accounted for only 28 percent of units sold while sales of 90 percent-completed homes totaled nearly 60 percent. In the same year, homebuilding and related financing accounted for 14 percent of total revenues for the company, contributing $108.4 million.
By the mid-1980s Celotex found itself staggering under an ever mounting litigation load. In 1984 approximately 21,100 lawsuits representing 25,600 persons were pending against one or more of the subscribers of the Asbestos Claim Facility, including Celotex. By the following year this figure had climbed to 28,800 lawsuits representing 34,900 persons, and a year later there were approximately 43,900 bodily injury claims pending. By the time Kohlberg Kravis Roberts moved to acquire the company in 1987, pending lawsuits exceeded 50,000, only to climb again, to 58,000, in the following year. The actions taken by the subsidiaries, however, allowed KKR to proclaim the company's litigation risk "manageable." Under corporate law, the parent company could not be held liable for claims against its subsidiaries.
Kohlberg Kravis Roberts proceeded with its purchase of Jim Walter Corporation for $2.4 billion—including $1.1 billion in junk bonds—in August 1987. The company was a perfect takeover target; it had healthy profits, strong cash flow, and a raft of subsidiaries that could be sold to reduce debt. Share price for the takeover jumped to $60, with bidding at one point reaching the heady level of $67 per share. At KKR's request, Jim Walter joined the group of investors who bought the company. He became a chairman of Hillsborough Holdings Corporation and Walter Industries, Inc.—two companies organized to acquire Jim Walter Corporation—and retained his existing management team.
The company was split into two holding companies following the sale. Jim Walter Corporation retained ownership of Celotex, and Hillsborough Holdings Corporation became the parent of the other subsidiaries. Jim Walter Corporation was sold to Jasper Corporation in April 1988. The other subsidiaries merged into HHC, all under the name of Walter Industries, Inc., which was the main subsidiary of HHC. Several of the company's businesses, including the marble quarrying and paper operations, were quickly sold to pay down debt.
Key Dates:
- 1946:James W. Walter and O.L. Davenport go into business selling shell houses.
- 1948:Walter and Davenport divide their business and assets; Walter takes the business, renaming it Walter Construction Company.
- 1955:The business is incorporated as the Jim Walter Corporation.
- 1956:Walter enters the mortgage business.
- 1964:The company acquires Celotex and goes public.
- 1969:Walter acquires U.S. Pipe and Foundry Company.
- 1972:Panacon Corporation, Canada's number three asbestos producer, merges with Celotex.
- 1976:Jim Walter Resources is founded.
- 1985:Celotex struggles under the load of asbestos lawsuits.
- 1987:Kohlberg Kravis Roberts acquires the Jim Walter Corporation and takes the company private.
- 1988:Celotex is sold off, and Walter's other subsidiaries are organized under the name Hillsborough Holdings Corporation and and renamed Walter Industries.
- 1989:Company is forced into Chapter 11 bankruptcy proceedings.
- 1991:The company's long-time CEO Joe Cordell steps down, and Robert "Bull" Durham takes over.
- 1994:The courts find Walter not liable for Celotex asbestos claims.
- 1995:Walter emerges from Chapter 11 and is taken public the following year.
- 1997:KKR increases its stake in Walter to 26 percent; Walter returns to profitability.
- 1998:The company identifies core business components and begins efforts to sell off the rest.
- 2000:Walter begins a three-year stretch in the red with a loss of $104.7 million. A proposal to liquidate Walter is voted down at the shareholders' meeting.
- 2001:Amid continuing struggles, Don DeFosset takes over as CEO in November.
- 2004:Coal prices rise, bringing Walter Industries back to profitability.
Chapter 11 Protection: 1989–95
In 1989 Houston attorney Stephen D. Sussman, of Sussman Godfrey, filed a suit on behalf of asbestos victims in Beaumont, Texas, an industrial area where many of the plaintiffs lived. The new lawsuit named KKR, Hillsborough Holdings, and Walter Industries as principal defendants. The suit put an end to KKR's plan to restructure the debt assumed by Hillsborough Holdings Corporation. Further asset sales were blocked, and the price of HHC's junk bonds plummeted. HHC was unable to meet the obligations imposed by the sale of the junk bonds that funded the buyout. On December 27, 1989, Hillsborough Holdings Corporation and 31 of its subsidiaries each filed for Chapter 11 bankruptcy in Tampa. Only two subsidiaries, Cardem Insurance Co. and Jefferson Warrior Railroad Company, did not file petitions for court-protected reorganization.
In April 1990 Judge Alexander L. Paskay, chief bankruptcy judge for the U.S. Bankruptcy Court in the Middle District of Florida, recommended that the asbestos suit filed in Texas be heard in his court. In July the U.S. District Court for the same district adopted his recommendation, and the case was moved to the Tampa federal bankruptcy court.
While the legal wrangling continued, in early 1991 the CEO of Walter Industries, Joe Cordell, announced his retirement because of his battle with cancer. Lacking solid leadership from within the company, Walter Industries conducted an executive search that led to the hiring of G. Robert (Bull) Durham, who had retired two years earlier after turning around Phelps Dodge Corporation. When asked by Financial World in 1991 why he would come out of retirement to take over such a troubled company, Durham replied, "There is not a whole lot of fun to running a company that is doing well." Jim Walter continued as chairman of Walter Industries.
Despite the new leadership, the company would be unable to reorganize until the asbestos litigation was resolved. Judge Paskay finally issued a ruling in April 1994, stating that Walter Industries could not be held liable for the Celotex asbestos claims. Appeals ensued, with the company initially proposing a reorganization plan that set aside no funds to settle the continuing claims. Under pressure from its creditors, however, on March 17, 1995, Walter Industries emerged from Chapter 11 through a plan that settled the more than $2.6 billion in claims by having the company contribute $375 million to the Celotex Settlement Fund, which had been set up by Celotex and included the asbestos claimants. Part of the payment was in the form of Walter Industries stock; by early 1997 the fund claimed a 10.9 percent stake in the company.
Postbankruptcy: The Late 1990s
Upon the company's emergence from bankruptcy, KKR held just 12 percent of Walter Industries. KKR remained committed to its investment, however, and by January 1997 had increased its stake to 26 percent. In January 1996 Walter Industries became a public company listed on the NASDAQ. Jim Walter, meanwhile, retired in October 1995 and was succeeded as chairman by Durham, with Kenneth E. Hyatt, who had been president of Celotex, taking over as president. The company's troubles seemingly over, Durham himself then retired in June 1996, with Hyatt becoming chairman, CEO, and president. At the same time, Richard E. Almy was named executive vice-president and chief operating officer, having previously served as president and COO of JW Aluminum and JW Window Components.
Walter Industries recovered quickly from its dark days of bankruptcy, surging in the strong market for new homes of the mid-1990s. The financial picture was strong enough by December 1995 for the company to be able to retire the $490 million in junk bonds that it had used to finance the reorganization plan just nine months earlier. More evidence of a recovery came in the form of a return to acquisitions. In June 1997 Walter Industries acquired Neatherlin Homes Inc., a builder of low-priced homes based in Texas. In September of that same year, the company announced that it would pay about $400 million for Applied Industrial Materials Corporation (AIMCOR), a private company based in Stamford, Connecticut, with about $450 million in revenues and $50 million in operating income annually. AIMCOR, through its Carbon Products Group, was the world leader in the production of petroleum coke, which is used in numerous industrial processes, including the manufacture of steel and cement. Its Metals Group manufactured and sold a variety of ferroalloys, metals, and specialty materials used in the steelmaking and metal-casting industries. AIMCOR fit in nicely with Walter Industries' other industrial subsidiaries, such as U.S. Pipe, Sloss Industries, and JW Aluminum.
After posting a heavy loss in fiscal 1995, a net loss of just $84.7 million was posted for 1996, and the company was back in the black in 1997 with net income of $37.1 million. Well on the road to recovery, Walter Industries had the same solid core of businesses that had made it an attractive takeover target in the mid-1980s. By aggressively building on this core through acquisitions, Walter Industries seemed capable of exceeding the glory days of the original Jim Walter Corporation.
Rocky times were still to come for the company, however. In 1998 and 1999, Walter Industries identified and began the process of selling off its non-core businesses. Jim Walter Homes and United States Pipe and Foundry, the company's most profitable businesses, led the list of core properties. J.W. Window Components was sold off in 1998, and the coal-mining subsidiary Jim Walter Resources, building product manufacturer Vestal Industries, industrial materials and tool provider Southern Precision Corporation, and coke and slag wool company Sloss Industries were targeted for divestiture.
2000 and Beyond
By August 2000, Walter Industries' success was reversed. Revenues remained at $1.91 billion, with no change over the previous year, and the 1999 net earnings of $35.6 million were gobbled up by a $104.7 million loss posted at the end of 2000. A $167 million write-down on the value of Jim Walter Resources, for which Walter Industries was unable to find a buyer, contributed to the loss. In March, as the company's fortunes began to slip, CEO Ken Hyatt was fired. After a period under the guidance of an interim CEO, majority shareholder Kohlberg Kravis Roberts hand-picked a turnaround expert for the top office: Robert G. Burton, formerly of the printing giant World Color. He remained on the job only 14 weeks before quitting. According to the Tampa Tribune in February 2001, "Burton's brusque management style" and his elimination of 375 jobs—about five percent of Walter's workforce—created a great deal of ill will among employees and did little to reverse the company's losses. After another stretch with an interim CEO, the company hired Don DeFosset, who was previously CEO of an auto parts supplier in Rochester Hills, Michigan, in November. Commenting that he took the job at Walter because of, not despite, the company's problems, DeFosset remarked to the Tampa Tribune in February 2001, "Walter Industries has already taken the traditional kind of approaches to improving its bottom line.… Now it's time to change the nature of the work."
DeFosset had his work cut out for him. At the October 2000 shareholders' meeting, Tom McKay, manager of an investment fund that controlled two percent of the company's stock, raised a vote on the question of liquidating Walter. McKay argued that liquidation could bring shareholders between $20.50 and $25 per share at a time when Walter's stock hovered between $7 and $9 per share. Although the proposal was voted down, three voters, including McKay, who represented 20 percent of the company's shares lent their approval to the idea. DeFosset responded to the challenge by changing the culture at Walter. He introduced Six Sigma, a work analysis model made popular by General Electric CEO Jack Welch, which focused on reducing variations and defects in processes. DeFosset also emphasized openness and candid communications with employees. When McKay renewed his liquidation proposal at the April 2001 shareholders' meeting, not only was the idea voted down, but it met with the approval of less—only 16 percent—of the ownership of the company.
There was good reason for such hopefulness. In July 2001 Walter Mortgage Co. began business issuing loans to people who needed assistance securing lots—whether buying, buying out a partner's share, or removing liens on land—on which to build a Jim Walter home. The new company opened up previously untapped avenues of business for Walter Homes and complemented progress in creating efficiencies at the company, which was scaling back its operations in places where it had less visible market presence, reducing the number of its model home parks and the number of models in them, and introducing new models to attract buyers who could afford more expensive houses due to low interest rates. Walter Homes also ventured into building subdivisions on unused company property. Avoiding major metropolitan markets, where competition from other builders would be stiff, the company sited developments in such smaller communities in the South as Houma, Louisiana.
In September 2001, however, high hopes were put aside when methane explosions killed 13 miners 2,140 feet below Brookwood, Alabama, in Jim Walter Resources (JWR) Mine No. 5. The accident was the worst mine disaster in the United States since 1984 and the worst in Alabama since 1943. The miners' bodies were not recovered until November, after the damaged part of the mine was made safe for rescuers to enter by such measures as pumping 33.5 million gallons of water into the pit to drive off unvented methane. Families of the miners filed wrongful death suits, and the United Mine Workers of America pointed out a number of serious violations at the facility, which was America's deepest vertical-shaft coal mine; the federal government levied a $435,000 fine on JWR, citing the company for seven "high negligence" safety violations. Shortly thereafter, the mine was closed for a brief period. JWR reached a confidential settlement with the miners' families in January 2005.
Unable to find a buyer for the coal mining operation, Walter withdrew the company from the market in 2001, along with JW Aluminum, both of which had been put up for sale in 1999. In 2002, Walter posted a $52.5 million loss on sales of $1.4 billion; in 2001 sales had been $1.3 billion. In 2003 sales dropped again to $1.3 billion, and Walter lost $29 million. A price war in the pipe industry, falling coal prices, and difficulties rolling out a new data management and sales computer system at Walter Homes contributed to the 2003 loss. In addition, although mining operations had resumed at Mine No. 5, geological faults in the mine drove up the cost of extracting coal, and JWR closed the mine again, losing $16.1 million for the year. The year was not without some success, however; Walter managed to sell Applied Industrial Materials Corp. (AIMCOR), a manufacturer of petroleum coke Walter had acquired in 1997, to Oxbow Carbon & Minerals for $127.7 million. JW Aluminum, which had been withdrawn from sale due to lack of suitable bids, managed to fetch $125 million from Wellspring Capital.
In 2004, the company's fortunes turned once again. Coal prices began to rise due to an increased demand for steel worldwide. Walter took JWR off the market and re-opened Mine No. 5 as old customers increased their orders, onetime customers resumed buying, and new customers importuned JWR for coal. Walter's majority owner Kohlberg Kravis Roberts began slowly divesting its holdings, reducing its stake from 33.3 percent ownership to 27 percent by selling stock back to the company. Analysts considered the divestiture a sign of renewed health at Walter, since KKR specialized in bringing ailing companies back to health and then selling them at a profit. KKR had controlled Walter for 17 years, whereas it usually owned companies for an average of eight years. By the beginning of 2005, Walter Industries stock jumped from an average price between $10 and $15 per share to an average price around $30 per share. Janet Gellici, executive director of the American Coal Council in Phoenix, Arizona, and a 25-year veteran in the coal industry, told Dave Simanoff of the Tampa Tribune (January 9, 2005) that building booms in such countries as India and China and reduced exports from some coal-producing countries drove up demand for and prices of U.S. coal. Increased U.S. exports of the mineral would likely increase demand for coal and steel at home as the U.S. economy rebounded. Walter's return to profitability was directly linked to the rising coal market. "I think it's a longer-term trend," said Gellici, adding "I don't see that going away anytime soon."
Principal Subsidiaries
Best Insurors, Inc.; Cardem Insurance Company, Ltd.; Crestline Homes, Inc.; Jim Walter Homes, Inc.; Jim Walter Resources, Inc.; Mid-State Homes, Inc.; Neatherlin Homes; Sloss Industries; United States Pipe and Foundry Company, Inc.; Walter Mortgage Company.
Principal Operating Units
Homebuilding; Financing; Industrial Products.
Name: Walter Industries, Inc.
Address: 4211 West Boy Scout BoulevardCity: Tampa
State: Florida
Zip: 33607-2551
Country: U.S.A.
Phone: (813) 871-4811
Web: http://www.walterind.com
Public Company
Incorporated: 1955 as Jim Walter Corporation
Employees: 4,953
Sales: $1.5 billion (2004)
Stock Exchanges: New York
Ticker Symbol: WLT
NAIC: 332996; 522310; 531110
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